Return to the Gold Standard would be madness … I was, until recently, Economics Editor of The Telegraph, but these days I am at the Kennedy School of Government at Harvard, where I will blog occasionally when I'm not knee-deep in homework. If you so fancy, you can still find my book – 50 Economics Ideas You Really Need to Know – here … I almost spat my coffee across the room when I saw the headline plastered across the front of the FT this morning: Robert Zoellick, president of the World Bank, is calling for a debate on the return to the Gold Standard, it said. Of course, when you read the column upon which the news story is based (subscription only, this being the FT), it is far less clear that Zoellick really wants a return to the 19th century international macro-economic structure. Instead, he merely seems to have name-checked gold as a possible mechanism to help us wean ourselves off our reliance on the dollar as the world's reserve currency. – UK Telegraph/Edmund Conway
Dominant Social Theme: Gold is a barbaric relic and the future of money has nothing to do with it.
Free-Market Analysis: We will try to address Edmund Conway's screed against gold as best we can. The prejudice it shows is startling and reveals once again that intelligence, in our view, is no substitute for wisdom. It is interesting to note that those who may come from privilege and are numerically adept may have no deeper insights than anyone else – and often less – in the modern day. Professor Conway may be a brilliant man and a successful journalist, but he is apparently steeped in the intellectual prejudices of his class. He may teach at Harvard but when it comes to economic matters (apparently his specialty) he seems to have little taste for the sweep of monetary history. We will take his arguments one at a time:
1) If there were a major domestic recession, the countries would simply have to suffer it. They would not be able to cut interest rates to alleviate the pain. In other words, countries would have to deflate, and suffer the social pain that goes with this, if they are to keep to the Gold Standard in times of economic stress. This may have worked well in the 19th century, when the poorer households who would tend to be affected couldn't do anything about it, but I can think of few circumstances under which a democracy (with one-man one-vote) would allow it.
How does one arrive at a "recession" – whatever that is, and why do "countries have to suffer it." We find these assumptions questionable. Countries are metaphorical entities to begin with and do not suffer through anything. PEOPLE suffer. Also, countries do not cut rates. People in certain roles with certain powers cut interest rates – and only when banks are under the thumb of the state. What this really means is that Professor Conway is satisfied with fiat currency because it is the most easily manipulated money and is satisfied with a regulatory regime in which banks and money are under the control of a given central bank and those behind it who pull the strings.
Another point: In a normal, free-market economy, recessions and depressions are ameliorated by money itself. When a regional economy heats up, the price of money likely rises a little, which may put a natural brake on economic over-heating. As the economy cools down, the money supply shrinks. The market itself controls the volume of money and thus the business cycle itself is far less violent in a gold and silver based economy than one that is fueled by paper money.
2. There would also be a second possibility of deflation (or for that matter inflation) because of the arbitrary factor of tying one's currency to a metal. If there was suddenly a massive discovery of gold, this would pump extra inflation into the global system; if there was a drop-off in gold discoveries (as there was in the late 19th century), governments would find themselves having to impose swingeing pay cuts on their populations in order to keep to the Standard. The fundamental point here is that the amount of gold in the ground is finite, whereas the capacity of humans to increase their economic output and productivity is still increasing exponentially, and should continue to do so, barring the possibility of falling back into the dark ages.
This point dismisses the function of hoarding. Economist Murray Rothbard postulated that a gold standard could be run without a single new discovery of gold because people would hoard or dis-hoard as necessary. We don't entirely agree with that: We tend to believe that mines, too, are sensitive to the price of gold and silver and thus mines tend to produce more or less depending on the price. Certainly a large discovery of gold historically skews the price of gold, but this can be lessened by hoarding. When prices go down as a result of gold prices falling, people hoard more, taking supplies off the market. In any event, thanks to Rothbard, we understand function of hoarding. Conway apparently does not.
3) An end to banking as we know it. This might not sound so bad, given the horror the banks brought our way in the crisis, but it is worth dwelling on for a moment. The Gold Standard was incompatible with fractional reserve banking, and the Bank of England could barely carry out its role as lender of last resort in the 19th century without having to bend the rules significantly (which, as far as some are concerned, fatally undermined the system). I'm all for a reconsideration of how we structure the banking system (my favoured plan is to impose unlimited liability on bank owners) but let's not leap into another monetary system without considering how far reaching the consequences would be.
Let it be so! An end to "banking as we know it" is fine with us. The "banking" in today's Western economies is simply a monopoly-distribution point for the dissemination of fiat currency. Central banks have got to distribute money through banks because the alternative – simply distributing it to people – would reveal the scam for what it is. By filtering the money-printed-from-nothing through banks, the process retains a mysterious quality. It is also rendered more complex, which is necessary when one is promoting a Ponzi scheme. Finally, bank distribution allows for a debt add-on that further controls the process. The situation is incredibly destructive, ruinous and benefits, essentially, on a very people who are the most direct beneficiaries of central bank funding stream. Conway concludes as follows:
There is a half-century cycle at play here: we move from one macro-economic system, it works well for a few decades (due less to the explicit rules at play than the assumption that central banks will enforce them if necessary). Eventually, the system's credibility breaks down … We are currently at the moment of hand-wringing and tears, which means the next few years will be both fascinating and terrifying. Eventually, we'll come to a solution. Everyone will believe the system has been repaired, and that Bretton Woods III or whatever we'll call it will solve our international monetary woes. And they'll be right. Until they're wrong."
From our point of view, the idea that "we'll come to a solution" is a depressing one. "We" obviously means "world-leaders," the same group (controlled from behind the scenes by powerful banking families) that created the current mess. There is a solution of course, which is to let the market itself handle money. Perhaps it is too simple for someone used to the complex minds that populate Ivy League institutions.
We have one area of commonality. We do not, either, know where the world's monetary system is going to end up, though given its chaos we have long predicted it is headed back to some sort of gold standard. There are many kinds of precious metals standards, of course. If new money, eventually, is to be based on gold, then governments might agree on certain percentages of gold necessary to hold in order to print currency, or even a certain amount of currency. Alternatively, government could simple set a gold-and-silver ratio and then let the market determine further price fluctuations. This would be a more laissez faire, free-banking solution.
Here at the Bell, we do believe in gold and silver as money – private money. In a private money system, absent government control, even the biggest holders of gold and silver would not be able to manipulate the market. The ratio between gold and silver, once tampered with, would sound the alarm as well. This kind of ancient money system has worked well, so far as we can tell, on and off for thousands of years. Our preference, therefore, is a scenario in which governments can come to no agreement on what money is or how much it is worth. This would leave it up to the market itself to decide – and there would then be no predetermined prices or price ratios to distort the market and cause trouble further down the road.
Given digital technology and its infinite divisibility, there is no reason why a single additional ounce of gold (or silver) would need to be mined to produce a workable, free-market system. Do we believe we'll get there? Probably not. But whatever emerges out of the current chaos may be better than what we've got – even monetary writer Ellen Brown's municipally-based public fiat system would be better than a monetary system essentially run by a few powerful families behind the scenes – although let us be clear we are by no means supporting Ms. Brown's initiatives. US Congressman Ron Paul's call for competing currencies is certainly a much more attractive solution. Let systems compete and the best ones (or one) will win out. Unlike Professor Conway, we believe the closer we get to a truly free-market based precious metals system the better off we shall be.